MARKETS SPECTATOR: Is China due for a rebound?

The overwhelmingly bearish stance towards China could be about to change, if the recent surge in China-facing ETF's is anything to go by.

It’s time to start allocating some funds towards China as markets are pricing in the ‘worst case scenario’.

As we touched on last week, we’re starting to see more and more life in China-facing exchange traded funds.

Bespoke Investment Group, a very well regarded investment research provider put out the below chart recently.

It said "as stocks here in the US have been struggling over the last few weeks, the China ETF (FXI) has been surging. Since making a triple bottom on September 5th, FXI is up 13.36 per cent, and yesterday the ETF broke out above its sideways summer trading range. How quickly trends can change.”

Source – Bespoke Investment Group

It’s so easy to get caught up in all the headlines about slowing Chinese growth and how the once booming Chinese economy is headed for a hard landing. Whether this plays out or not is anyone’s guess. However, the one thing we do know is that it looks like markets are already discounting the worst into prices.

Recent sentiment surveys in the US have shown an overwhelmingly bearish stance towards anything in China or related to it, including the big diversified miners in BHP Billiton and Rio Tinto. The easy trade, both locally and globally is to ‘run with the herd’ and remain bearish on China.

However, by just looking at the price action of the index versus the ETF’s one can tell that there is something going on. The point is that it looks like all the bearish consensus is priced in and that some offshore investors are starting to allocate funds towards Chinese-facing ETF’s.

Source – Iress

So the above chart shows us that both the ETF’s are significantly outperforming the Shanghai Composite index. Both the ETF’s are listed in the US, meaning they are and can be openly traded by nearly anyone.

This differs drastically to the Shanghai Composite index which can only be traded by Chinese residents, of which approximately 70 per cent of them are retail. This in itself gives a great contrarian point of view as retail traders are renowned for being bearish towards market bottoms and bullish towards market tops.

Quite clearly, the bulk of investors are not positioned for any kind of positive developments or stimulus measures. It looks like momentum is starting to shift within the economy and should we see any positive surprises there could be a significant move to the upside as the majority of participants try to play catch-up.

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